Your chances of being made whole on Puerto Rican bonds? None to null — Malcolm Berko

Dear Mr. Berko: In 2013, my stockbroker had me buy $60,000 worth of Puerto Rican Sales Tax Financing Corp.’s tax-free bonds. I bought these bonds for my individual retirement account. The coupon was 5.5 percent. I paid $770 per $1,000 bond ($46,200 total), and they were supposed to mature in 2022. I got a great 7 percent current return, and the bonds were guaranteed by the collection of sales taxes in Puerto Rico. But now the bottom has dropped out. The bonds pay nothing, and I’ve lost at least 50 percent of my investment. My broker says that the bonds were recommended by his firm and that he didn’t know they were risky. Three of my golfing buddies use the same broker and own the same bonds. What are our chances of getting out of this without getting scorched? Could you explain what happened? — CD, Springfield, Ill.

Dear CD: Your chances of being made whole are none to null! Puerto Rico was a foreseeable economic disaster. It was a result of such gross political stupidity and cupidity that even members of our Congress were stupefied. However, I’m told that your senator Dick Durbin is close to lots of Puerto Rico’s important politicians. So perhaps a contribution from you and your golfing buddies to Durbin’s political action committee could be helpful in ways you can imagine.

For at least a decade, Puerto Rico (meaning “rich port” in Spanish) was a predictable disaster from which only a limited recovery was possible. Bondholders, mostly hedge funds and bottom feeders, purchased huge pieces of Puerto Rican debt because Congress encouraged them to believe that those bonds had the imprimatur of the U.S. Treasury. So Wall Street’s hedgies and bottom feeders purchased the island’s bonds at enormous discounts, pocketing 8 to 12 percent tax-free. Now they’re bleeding like stuck pigs.

For years, these funds paid dues to their congressmen, believing Washington would, if necessary, rescue and guarantee Puerto Rico’s bonds. But for unexplained reasons, when push came to shove, Congress refused to guarantee Puerto Rico’s debt. But the hedgies and bottom feeders had a second ace in the hole. Because Puerto Rico cannot declare bankruptcy, the Obama administration devised a plan called the Puerto Rico Oversight, Management and Economic Stability Act, or PROMESA (which means “promise” in Spanish), which the hedgies and bottom feeders were eager to accept. One of the elements of PROMESA is a “cram-down” provision giving the insolvent Puerto Rican government the power to force a bad deal on unwilling creditors. This gives Puerto Rico’s politicians (and certain members of Congress) nearly czar-like control over how much of and to whom Puerto Rico’s billions of dollars’ worth of debt is to be paid.

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Be assured that the bottom feeders and hedgies who made the requisite political contributions will be treated with favoritism. That’s how the Mercedes benz! Selected Puerto Rican politicians will receive their expected vigorish, and some members of Congress will also participate. And it shouldn’t come as a surprise that like sharks to blood, swarming U.S. lawyers will usurp a handsome percentage of every claimant’s distribution. And you, dear reader, because you own this in your IRA, won’t even get a tax loss!

Next time you see Mitch McConnell, Harry Reid, Jack Lew, Chuck Schumer and Marco Rubio on TV, be mindful that they voted for and supported PROMESA. You’ll recognize them by their sincere smiles, their candid rhetoric and their tonsured hair that slicks back like cake frosting. The financial press has bent overboard to be fair. But the media fail to recognize that many of the participants in this fiscal farce consider this an opportunity to butter their own nests. And that’s a low blow.

There’s more. There’s a very concerning provision in PROMESA stipulating that if board members are unable to agree on the amounts to be distributed and to whom, Congress can remove them and appoint preferential members to the board. It’s concerning because the consensus believes that influential members of Congress could propose guarantees to Puerto Rico like those made to the Tennessee Valley Authority, New York City in the 1970s, Fannie Mae, Freddie Mac and Detroit recently. No matter how you chop the cheese, Charlie, there’s going to be millions of dollars waiting to pollute a politician.

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